1. Copyright 2008 The McGraw-Hill Companies 19-1 Economics of Agriculture Economics of Farm Policy Economics of Price Supports Reduction of Surpluses Politics of Farm Policy Last Word Key Terms End Show 19 Agriculture: Economics and Policy

2. Copyright 2008 The McGraw-Hill Companies 19-2 Economics of Agriculture Economics of Farm Policy Economics of Price Supports Reduction of Surpluses Politics of Farm Policy Last Word Key Terms End Show Chapter Objectives Why Agricultural Prices and Farm Income are Unstable Why Huge Numbers of Labor Resources Have Exited U.S. Agriculture During the Past Several Decades The Rationale for Farm Subsidies and the Economics and Politics of Price Supports (Price Floors) Major Criticisms of the Price- Support System in Agriculture The Main Elements of Existing Federal Farm Policy

3. Copyright 2008 The McGraw-Hill Companies 19-3 Economics of Agriculture Economics of Farm Policy Economics of Price Supports Reduction of Surpluses Politics of Farm Policy Last Word Key Terms End Show Economics of Agriculture Extreme Diversity Farm Products or Farm Commodities Food Products Short-Run: Price and Income Instability –Inelastic Demand for Agricultural Products –Fluctuations in Farm Output –Shifts in the Demand Curve for Farm Products

4. Copyright 2008 The McGraw-Hill Companies 19-4 Economics of Agriculture Economics of Farm Policy Economics of Price Supports Reduction of Surpluses Politics of Farm Policy Last Word Key Terms End Show Economics of Agriculture The Effects of Changes in Farm Output on Agricultural Prices and Income D QpQp PpPp Q 0 P PnPn PbPb QnQn QbQb Normal Farm Income n p b

5. Copyright 2008 The McGraw-Hill Companies 19-5 Economics of Agriculture Economics of Farm Policy Economics of Price Supports Reduction of Surpluses Politics of Farm Policy Last Word Key Terms End Show Economics of Agriculture The Effects of Changes in Farm Output on Agricultural Prices and Income D1D1 P1P1 Q 0 P P2P2 QnQn b a D2D2

6. Copyright 2008 The McGraw-Hill Companies 19-6 Economics of Agriculture Economics of Farm Policy Economics of Price Supports Reduction of Surpluses Politics of Farm Policy Last Word Key Terms End Show Economics of Agriculture Long-Run: A Declining Industry –Supply Has Increased Rapidly Due to Technological Progress –Demand Has Increased Slowly –Inelastic With Respect to Income

7. Copyright 2008 The McGraw-Hill Companies 19-7 Economics of Agriculture Economics of Farm Policy Economics of Price Supports Reduction of Surpluses Politics of Farm Policy Last Word Key Terms End Show Economics of Agriculture Risk Management Techniques – Futures Markets –Contracting with Processors –Crop Revenue Insurance –Leasing Land –Nonfarm Income

8. Copyright 2008 The McGraw-Hill Companies 19-8 Economics of Agriculture Economics of Farm Policy Economics of Price Supports Reduction of Surpluses Politics of Farm Policy Last Word Key Terms End Show Economics of Agriculture Technology and Supply Increases Lagging Demand –Income Beyond Subsistence –Population Growth Not as Rapid as Supply Graphically…

9. Copyright 2008 The McGraw-Hill Companies 19-9 Economics of Agriculture Economics of Farm Policy Economics of Price Supports Reduction of Surpluses Politics of Farm Policy Last Word Key Terms End Show Economics of Agriculture The Long-Run Decline of Agricultural Prices and Farm Income D1D1 P1P1 Q 0 P P2P2 Q1Q1 b a D2D2 S1S1 S2S2 Q2Q2 c

10. Copyright 2008 The McGraw-Hill Companies 19-10 Economics of Agriculture Economics of Farm Policy Economics of Price Supports Reduction of Surpluses Politics of Farm Policy Last Word Key Terms End Show Economics of Agriculture Consequences –Increased M.E.S. –Agribusiness –Subsidies Boost Farm- Household Income U.S. Farm Employment and Number of Farms 1950-2004 As a Percentage Of Total Employment Farm Employment In Millions Of People Year Number Of Farms, Thousands 1950 1960 1970 1980 1990 2000 2004 Source: USDA, Economic Research Service, Commerce Dept. 9.9 7.1 4.5 3.7 2.9 3.0 3.1 17 11 6 4 2 5388 3962 2954 2440 2146 2172 2113

11. Copyright 2008 The McGraw-Hill Companies 19-11 Economics of Agriculture Economics of Farm Policy Economics of Price Supports Reduction of Surpluses Politics of Farm Policy Last Word Key Terms End Show Percentage of the Labor Force in Agriculture, Selected Nations GLOBAL PERSPECTIVE Ethiopia Mozambique China India Brazil Russia Japan France United States Germany 0 25 50 75 100 82.0 80.3 66.0 59.2 16.1 10.2 3.8 3.2 2.0 Source: World Resources Institute, Latest Data Economics of Agriculture 2.4

12. Copyright 2008 The McGraw-Hill Companies 19-12 Economics of Agriculture Economics of Farm Policy Economics of Price Supports Reduction of Surpluses Politics of Farm Policy Last Word Key Terms End Show Economics of Farm Policy Subsidized Since 1930s –Support for Agricultural Prices, Income, and Output –Soil and Water Conservation –Agricultural Research –Farm Credit –Crop Insurance –Subsidized Sale of Farm Products in World Markets

13. Copyright 2008 The McGraw-Hill Companies 19-13 Economics of Agriculture Economics of Farm Policy Economics of Price Supports Reduction of Surpluses Politics of Farm Policy Last Word Key Terms End Show Agricultural Subsidies, Selected Nations GLOBAL PERSPECTIVE Switzerland Norway North Korea Japan European Union Turkey Canada United States Mexico Australia 0 20 40 60 80 68 63 56 33 27 21 18 17 Source: Organization for Economic Cooperation and Development Economics of Farm Policy 4

14. Copyright 2008 The McGraw-Hill Companies 19-14 Economics of Agriculture Economics of Farm Policy Economics of Price Supports Reduction of Surpluses Politics of Farm Policy Last Word Key Terms End Show Economics of Farm Policy Rationale for Farm Subsidies –Necessities of Life –“Family Farm” Institution –Extraordinary Hazards –Competitive Markets for Output While Inputs Have Significant Market Power

15. Copyright 2008 The McGraw-Hill Companies 19-15 Economics of Agriculture Economics of Farm Policy Economics of Price Supports Reduction of Surpluses Politics of Farm Policy Last Word Key Terms End Show Economics of Farm Policy Agricultural Adjustment Act of 1931 –The Parity Concept –Parity Ratio Parity Ratio = Prices Received by Farmers Prices Paid by Farmers

16. Copyright 2008 The McGraw-Hill Companies 19-16 Economics of Agriculture Economics of Farm Policy Economics of Price Supports Reduction of Surpluses Politics of Farm Policy Last Word Key Terms End Show Economics of Price Supports Price Supports Surplus Output Gain to Farmers Loss to Consumers Efficiency Losses Other Social Losses Environmental Costs International Costs

17. Copyright 2008 The McGraw-Hill Companies 19-17 Economics of Agriculture Economics of Farm Policy Economics of Price Supports Reduction of Surpluses Politics of Farm Policy Last Word Key Terms End Show Economics of Price Supports Q 0 P b c a S D S Surplus D PePe QeQe PsPs Tax Burden Of Surplus QcQc QsQs

18. Copyright 2008 The McGraw-Hill Companies 19-18 Economics of Agriculture Economics of Farm Policy Economics of Price Supports Reduction of Surpluses Politics of Farm Policy Last Word Key Terms End Show Reduction of Surpluses Restricting Supply –Acreage Allotments Bolstering Demand –Gasohol Criticisms and Politics –Criticisms of Parity Concept –Criticisms of Price Supports –Symptoms Not Causes –Misguided Subsidies –Policy Contradictions

19. Copyright 2008 The McGraw-Hill Companies 19-19 Economics of Agriculture Economics of Farm Policy Economics of Price Supports Reduction of Surpluses Politics of Farm Policy Last Word Key Terms End Show The Politics of Farm Policy Public Choice Theory Revisited Changing Politics Declining Political Support World Trade Considerations Recent Reform –Freedom to Farm Act of 1996 –Farm Act of 2002 –Direct Payments –Countercyclical Payments (CCP) –Marketing Loan Program

20. Copyright 2008 The McGraw-Hill Companies 19-20 Economics of Agriculture Economics of Farm Policy Economics of Price Supports Reduction of Surpluses Politics of Farm Policy Last Word Key Terms End Show The Sugar Program Price Supports and Import Quotas to Guarantee Minimum Price of Sugar to Domestic Producers Domestic Costs Import Quotas Developing Countries U.S. Efficiency Loss Global Resource Misallocation Last Word …A Sweet Deal

21. Copyright 2008 The McGraw-Hill Companies 19-21 Economics of Agriculture Economics of Farm Policy Economics of Price Supports Reduction of Surpluses Politics of Farm Policy Last Word Key Terms End Show Key Terms farm commodities food products agribusiness parity concept parity ratio price supports acreage allotments Freedom to Farm Act Farm Act of 2002 direct payments countercyclical payments (CCPs) marketing loan program

22. Copyright 2008 The McGraw-Hill Companies 19-22 Economics of Agriculture Economics of Farm Policy Economics of Price Supports Reduction of Surpluses Politics of Farm Policy Last Word Key Terms End Show Next Chapter Preview… Income Inequality and Poverty